What is a Law Firm in Transition?

There is no denying that the legal profession is in a tremendous state of flux.

An unfortunate number of law firms have faced significant challenges to their ability to move forward in a way that realizes their aspirations. We know the high-visibility names. Scores of other firms are wrestling with significant transitional questions today.  While some are more severe than for others, the truth is that in the current market more firms may be challenged by transition than those that are not.  These firms face one or more of four types of transition, generally identified as:

  1. Facing a decision that addresses the fundamental way that it has been doing business -- Firms regularly face significant decisions that make them re-examine the way they do business, or the future of their business. Properly responding to the shrinkage of a practice, lawyer count or market evolution, adverse litigation, financial losses or growth opportunities are typical precipitators. These kinds of decisions, even though not motivated by the existence of crisis, the need for restructure or controlled liquidation, nonetheless should cause a firm to re-think its approach to the practice of law.  A law firm in this position usually has the benefit of some time to make the right decision, but not unlimited time.
  2. In crisis -- Issues that will test survival take the discussion to a different level. Continued attrition, missing partner draws, declining profitability, and threatened or actual removal of borrowing ability are symptoms that signal crisis. In moments of crisis, managing the law firm understandably is traumatic.  And time is of the essence.
  3. Needing to reposition/restructure -- The need to reposition or restructure a law firm can arise from a number of developments. Repositioning or restructuring usually involves a firm being in a state of greater urgency than simply facing a transitional decision. The loss of significant clients, practice groups, offices, key lawyers, or a cost structure that has gotten out of balance with revenue can all signal the need to consider a repositioning or restructuring.  When this is the case, the clock is ticking -- and decisions tend to become increasingly time sensitive and critical.
  4. An orderly liquidation -- An unfortunate result of this market (and the most extreme of transitions) is the closing of a law firm. Firms in this position no longer have go-forward restructuring options. Often there are insufficient producing partners to cover the cover fixed costs and make continued operation viable. The only remaining option is an orderly liquidation that manages the claims against the firm, and minimizes disruption of lives. Choices made here are critical to a successful outcome.

The nature of the transitional decision faced by a law firm does not always fit nicely into one of the four categories described above. Sometimes more than one of the categories are presented; a law firm needing to reposition or restructure may, simultaneously, be in crisis.  If realistic repositioning or restructuring is realistic, it may avert the crisis.  In other instances, a law firm may initially believe it has time to re-think the way it practices, and adjust some of the fundamentals that underlie its business..  But if the wrong decisions are made, it may soon find itself in crisis and needing a repositioning/restructuring lest it slip into requiring a controlled liquidation.

Part Two: How to Tell Whether Your Law Firm is in Transition

Because law firms consist of a collection of individual lawyers (with virtually each lawyer having an opinion he or she is ready to express), law firms are living and breathing souls that constantly evolve and change.  Change can be good.  But some changes or patterns signal that a law firm is facing transition.  And that kind of change can present challenges that are best addressed early if the firm's evolution is to continue positively.

Recognizing the signs of transition is critically important to the longevity of a firm.  By recognizing these signs, a firm can design a solution that decisively fixes what ails it.  As is often suggested in another context, the first step to dealing with a problem is to acknowledge its existence.

The early indicators of transition are varied, and law firm transition can come in all shapes and sizes, but the most common warning signs are:

  1. Fixed costs per lawyer are consistently increasing.  When fixed costs per lawyer increase year after year, it is a sign that your overhead is either out of whack or becoming so.  The trend cannot continue and needs to be addressed or you will spend your firm out of business.
  2. Production declines are addressed by raising billing rates. If your firm has a budget target only met by raising billing rates in order to offset a decline in production, you either did not pass Economics 101 or you were an art major.  There is a ceiling, and any benefit to the firm will be short lived.
  3. Turnover is increasing.  If you keep losing people, something is amiss.  Not only does a loss of people increase your fixed costs per lawyer; departures can oftentimes be based on a perception in the rank-and-file that all is not well.  And perception can equal reality.
  4. Interest from quality laterals and law students has waned.  If you are good, people want to join you.  If you are not, most talent will take a pass.  The market for talent can be fierce and how you fare in that market can speak volumes on how your firm is perceived by those that have the choice on where they want to work. If the outside does not want in, the inside may soon want out.
  5. Your metrics show a year over year flatness or downward trend. Flat or downward metrics excite no one and place your institution at risk.  Your best and brightest may be placated for a while by financial engineering, but pulling on levers in an out of ordinary way is not sustainable
  6. The law or the marketplace is migrating away from your substantive and financial strength.  Neither our law nor our economy is static - it is ever changing.  Most lawyers are able to keep up with the changes and adapt as they occur.  But sometimes the changes are so dramatic (e.g. tort reform or real estate collapse) that what once was a lucrative practice is no longer so solid.
  7. The work you do and do well is subject to greater competition.  If the sweet spot of your practice has held you in good stead over the years, no doubt it has been noticed.  While competition generally is good and you would not have been a success had you not been willing to compete, excessive competition drives down rates, reduces market share and can place stress on the economics of your practice.  Worse yet, sometimes competition over time causes a specialty to become commoditized.
  8. A more efficient legal practice requires fewer people.  How can that be bad you ask? At first blush, having to employ fewer people to deliver excellent legal work to your clients is a good thing. Yet if your firm's infrastructure is built on a business model that assumes a certain number of people billing 2,000 hours a year, the disappearance of those timekeepers can strain your economics.
  9. Energy has been lost and the firm is stagnating.  An energized firm is one in which attorneys revel in successes, and new business breeds more success and business.  Unfortunately, many firms can't keep up that pace, and begin to experience a slowdown in energy.  A firm in malaise does not correct itself - it needs a kick-start.
  10. Your firm is aging.  Age catches up with all of us. Law firms are no exception.  The well-managed firm continually replenishes its ranks with young and vibrant attorneys in order to avoid the advent of age.  Easier said than done; but the need to reposition due to the march of time is common.
  11. Your firm has more empty offices than usual or planned. Simply put, if you have too much office space, see if this sounds familiar; your lease costs cause overhead-percentage-of-revenue to mushroom.  Empty offices depress your attorneys and send the wrong message to your clients when they venture into your hallways. Excess space saps the energy of your firm. See Number 9 above.
  12. Growth has slowed. Or stopped.  The nice thing about growth is that it suggests vibrancy.  When growth slows or stops, that vibrancy is gone or barely noticeable.  Additionally, growth creates higher fixed costs that don't go away once the growth stops.  In many firms, growth offsets the fact-of-life impact of lawyer turnover. But when growth stops a firm can find itself shrinking.  Try hiring good laterals when your firm is shrinking.  It is not easy.
  13. Financial metrics are trending downward.  If a year-to-year comparison of the firm's metrics reveals a decline, your partners, associates and lateral candidates will notice.  If your metrics don't compare well with those of competitors, it will be noticed internally and externally.  A decline in metrics is the scent that attracts vultures.
  14. Firm performance is uneven.  It is inevitable that practice group performance will be cyclical.  It is also a fact that some offices will be stronger than others.  But if uneven performance among practice groups or offices is noticeable and has stayed that way for a while, "one for all and all for one" is forgotten (if it ever had any vitality), and the risk of fraying around the edges increases.

Although not a comprehensive list of indicia of transition, if one or more of these signs sound familiar, careful attention is in order. Your law firm may already be wrestling with the challenges of transition.

Part Three: First Steps When You Recognize That Your Law Firm is in Transition

When a law firm begins to show signs of transition, many thoughts about the best way to address change will run through the mind of leadership.  While the degree of transition presented may vary, some fundamental steps can be taken to help the process, and ease the pain of change.

The degree to which dramatic action is required largely depends on how early the signs of transition are recognized.  But no matter where in the continuum transition is first observed, certain basic steps will pave the way for the development of a sound action plan.

When signs of transition surface, firm leaders should:

  1. Reach Out to the Firm's Most Valuable Assets (People). A successful law firm enjoys its success only if its most valuable lawyers are engaged and feel a part of the firm.  Immediately reaching out to a firm's most valuable assets (don’t be too fast to think that lawyers "with the number" are your only valuable assets) is critical.  Not only will doing so demonstrate leadership; it indicates that input is valued -- and this engages others in the process.
  2. Listen to What You Hear.  Talking to your people should not be viewed as a formality. Rather, approach conversations as fact-finding missions to understand how others view the transitional issues.  You might just learn something that is obvious to everyone but the management team.
  3. Review the Trends and Understand the Reasons.  When canvassing the troops, you may hear disparate suggestions/complaints that must be evaluated.  You have to cut through the noise.  The development(s) that creates the transitional concern tends to germinate over time and only manifest itself after festering over time. Go back and try to reconstruct the trends (that may not have been recognized previously), and understand their genesis.
  4. Identify Realistic Remedial Steps and Get Buy-in For the Plan.  Using what you have learned, develop a plan that is realistic in terms of action steps and time for implementation.  An action plan that shoots for the moon is destined for failure.  You may only have one shot. Make it count.
  5. Communicate Your Plan and Get Buy-In.  Get out to your people, communicate details of the likely plan, and get feedback.  If the feedback requires fine-tuning for the plan, do so; but then get buy-in from the masses.  Make it their plan and your chances of success go up exponentially.

When facing transition, "knowing"your firm and feeling its pulse is vital.  These steps help you get there.

Part Four: If in Transition, Take Immediate Action

A law firm that finds itself in transition should never assume that its issues will resolve themselves; nor should it defer to later the steps necessary to combat what ails it.  As counter-intuitive as it may seem, law firms are fragile things.

The foundation of most law firms sits on a slippery slope. For that reason, decisive steps need to be taken when transition hits because:

  1. For The Most Part, No Legal Impediment Exists to Prevent Departures. Unlike some industries, lawyers in most firms can leave as the mood strikes, and compete by joining another firm or setting up their own.  There is little to prevent your most valuable lawyers, practice groups or client service teams from walking out, never to return, the minute the elevator descends to the first floor.
  2. The "Run on the Bank" Risk is Real. Because legal impediments to departure are few, when one is followed by another, a "run on the bank" becomes possible. While banks can staunch any run with deposit insurance, a law firm has no such equivalent and may end up fighting like Jimmy Stewart in It's a Wonderful Life.
  3. A Lawyer's Independence Can Be Greater Than His Loyalty.  An unhappy or scared lawyer can overreact and decide he needs to get out, lest he be the one left behind, turning off the lights.  A healthy independent streak in most of us embeds the feeling that an alternative to the status quo exists, and it is not only an option, but perhaps a good one.
  4. Mistrust Increases in the Transitional Setting.  When crisis, concern or unease arise, not everyone is calm.  In fact, every firm's "Chicken Little" has the potential of adding more chicks and mistrust, fatalism or panic.  A leader can't hold everyone's hands 24/7.
  5. Meddling From the Outside Is Likely And Is Not Going to Help.  The sad part about trying to guide a firm through transition is that third parties, including your competitors, often undermine the initial success enjoyed from the internal shoring-up efforts.  Sometimes there are too few fingers and too many leaks in the dyke.

Maintaining control of your transition, and presenting your firm as strong despite its issues is vital.  Achieving that is only possible if immediate action is taken.

Part Five: Transition Can Be Good and Something to Embrace

A law firm in transition faces unexpected, unwelcome and unplanned change.  A common reaction among law firm leaders is that the transitional event(s) (whether representing a gradual decline or singular event) portends a troubling future.

An alternative view suggests that being in transition can be a helpful (perhaps even necessary) thing.  Indeed, a law firm in transition can seize the moment; embrace its situation (face it, it won't go away on its own) and reform itself into a stronger and better institution.

How in the world can transition be good?  Here are five reasons.

  1. Transition can galvanize and motivate the firm.  Until the law firm leaders recognize that something needs to be done, complacency can rule the day.  Motivating your people to do something out of the ordinary is near impossible.  But once unwanted change is presented, a reason exists to "circle the wagons."  Simply put, it can motivate.
  2. Transition presents the opportunity to take decisive action.  Until change is essential, there usually is a complete lack of interest in abandoning the old in favor of something new.  Once a firm finds itself in transition, not only is there a greater recognition that action is needed, but the rank and file looks for someone to take charge and make decisions.  Transition brings that opportunity.
  3. Transition allows you to examine a fresh approach.  When the law firm is rocking along, there is not a lot of support for straying from "the way we always do it."  A leader who has watched the market move in a new direction has far greater license to think about a new way of doing things when the old way has failed or is struggling.
  4. Transition can put you ahead of the competition.  If your firm is experiencing challenges, it is probably not alone.  Those in your same boat may not recognize it or have the resolve to deal with their predicament.  But a law firm that meets its challenge head-on can leap frog ahead of those wallowing in denial, and realize the fruits of its restructure.
  5. Buy-in for the new strategy can energize the firm.  Getting buy-in for mediocrity is virtually impossible.  But faced with a restructure that shows promise, people can get excited.  And excitement is contagious.

Leaders addressing transition face a fork in the road.  Acknowledge and embrace transition, and the correct fork is selected.  Go the other way, and things will not improve.

Part Six: Transition Can Be Unwanted and It Can Be Daunting, But It Cannot Be Ignored

In today's environment, law firms and their leaders long for yesteryear -- when there was ample business, good and reliable productivity, and an expectation that each year would be a financial success, even if it required adjusting the dials with expense cutting, the elimination of deadweight and putting on the "full court press" at collection time.  The work was there as were the receivables, so "cracking the whip" was a common management strategy.

Today more and more firms are facing more fundamental challenges.  These firms are in transition.  They have far more to do in order to be successful, and far more at stake.  "Whistling past the graveyard" will not work.

But it is not pre-ordained that a law firm in transition end up in the graveyard.  For law firms in transition, future success is based on early recognition of its situation, learning about the pressure points that exist, understanding the expectations and commitment of the law firm's assets, developing a responsive plan and executing on that plan.

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